Andrew Manton-Hall shares his learnings and thoughts on the session ‘Wide-Ranging Regulatory Reforms for insurers in the Fast Lane’, conducted by Brendan Fehon, Bhrajna Kalaiya and Georgia Amery at the 2021 All-Actuaries Virtual Summit.
Tick… tick… tick…
The countdown has begun.
On 10 December 2020, a Bill was passed outlining the Government’s response to the recommendations stemming from the Hayne Royal Commission. Many of these reforms are effective as of October 2021, leaving only a few more months for companies to understand, prepare for, and implement the necessary changes to their business practices. The wide-ranging nature and rapid implementation period of these reforms places some insurers well and truly in the ‘Fast Lane’ – a topic on which Brendan, Bhrajna and Georgia provided great insights during their presentation on 20 May 2021 as part of the Actuaries Summit.
The presentation provided some background for the reforms, before delving into a selection of some of the most significant changes that are coming through:
- Design and Distribution Obligations.
- Claims handling.
- Anti-hawking and deferred sales model.
- Breach reporting.
The presenters discussed how these reforms will affect team operations, system changes, product design, and pricing, before providing a summary of the role of the actuary in response to these changes.
Background and Context
Brendan began by outlining how the prevalence of regulatory changes across the Financial Services industry, particularly those relating to insurance, is of great significance to actuaries as we strive to fulfil our obligations and provide the best outcomes that we can for our customers and our clients. As the deadline for implementation of these reforms quickly approaches, there is a burning need for actuaries to understand how requirements have changed and ensure that their companies and their clients are compliant with the new regulations.
So, is this going to involve a whole lot of additional work for actuaries?
Well, yes, to some degree, but as Brendan points out – simply considering these reforms as a burden would neglect the great opportunity that they afford businesses to rethink their processes, improve the value that they provide to customers, and to minimise future risks. Yes, this is a challenging and demanding time for actuaries, but it is also a chance to revamp what we do and come out in a better position than before.
Design and Distribution Obligations
Bhrajna discussed the Design and Distribution Obligations (DDO) applicable from 5 October 2021. These initially arose in response to the Financial Services Inquiry in 2014 and have since been refined with RG274 (Regulatory Guide 274: Product design and distribution obligations) being released by ASIC in December 2020.
So, what is the purpose of DDO?
Bhrajna provides a simple explanation, she says that DDO is about embedding good conduct into a product’s life cycle and making sure that relevant parties are selling in accordance with the identified target market. The requirements apply differently to issuers (who have design obligations) and distributors (who have distribution obligations) to create accountability within insurance networks.
Design obligations are underpinned by the requirement to make a Target Market Determination (TMD) for financial products, as well as the need to take reasonable steps in relation to distribution. Distribution obligations, on the other hand, include not distributing unless a TMD has been made, and collecting information specified by the issuer. As such, although the set of obligations are distinct for issuers and distributors, there is some dependence between the two groups.
The presentation provided a useful overview of the impacts of DDO reforms, including the work required to develop TMDs, enhance existing product governance frameworks and system infrastructure, and demonstrate that they are taking reasonable steps in relation to distribution.
Claims handling as a financial service
Bhrajna continued on to discuss the inclusion of claims handling under the Corporations Act, which applies from 1 January 2021 with a 12-month transition period (applied differently to different companies). The key considerations here are to understand what products are considered ‘Financial Products’ as components of ‘Financial Services’, which will then be required to have an AFSL and meet a set of obligations. It is now going to be enforceable that claims are settled efficiently, honestly and fairly, and that reasonable steps are taken to ensure that representatives (including claims staff and other networks which represent the business) comply and are adequately trained. On top of this, there are also requirements relating to dispute resolution.
There are requirements for a number of groups to obtain an AFSL or be an authorised representative of an AFSL holder, including: insurers; insurer fulfilment providers; insurer claim managers; brokers involved in handling claims; and, people who provide financial product advice.
The idea of the ticking clock springs to mind once more. The 12-month transition period puts pressure on the affected companies to apply for an AFSL and consider whether or not any third party networks are also caught by the requirements.
Anti-hawking and deferred sales model
Georgia then discussed the requirements around Anti-hawking and the deferred sales model. The Hayne Royal Commission found that previously existing anti-hawking requirements in the Corporations Act failed to protect consumers and did not afford consumers sufficient control over their decisions to purchase financial products.
The new reforms provide consumers greater autonomy to determine how they would like to be contacted and what kinds of products they are offered. The reforms specify unsolicited contact, being contact which is not consented to by a consumer, and if it is made by telephone, face to face meeting, or a real time interaction as part of a conversation. As part of the reforms, customers now have a right to return and receive a refund for any product which has been sold to them in breach of these requirements.
Georgia also spent some time outlining the interactions between the anti-hawking reforms and the deferred sales model for add-on insurance. Add on products cannot be sold for four days after the purchase of the principal product or service, and, after six weeks, the add-on insurance can no longer be offered, and anti-hawking provisions apply once again.
And the clock keeps ticking… but this time, instead of counting down to implementation, it’s counting up in terms of breach reporting delay! Georgia provided some interesting insights into ASIC’s concerns regarding delays in breach reporting and the reforms that have been introduced to combat this issue. Georgia noted that ASIC found that it was taking an average of 1,726 days to identify an incident, and an additional 150 days from starting the investigation to lodging a breach report. ASIC had also been concerned about a lack of accountability for failures where they had arisen, and a lack of transparency allowing individual advisors to continue to operate despite previous failures.
Evidently, changes were required, and that is what has happened in the new reforms. These changes include expanding the scope of the provisions to require more breaches to be reported to ASIC and changing the timing requirements to ensure that businesses are reporting more breach situations more efficiently.
The role of actuaries
So… where does that leave actuaries?
The presenters concluded by providing insights into how the changes from these reforms will be relevant to actuaries. At a primary level, these changes affect the insurance value chain, while there are also impacts for pricing and valuation. There are questions to be asked in terms of the cost of sales, the cost of claims, and additional overheads (for example, with new system requirements), all of which may be asked of actuaries. We can also look to capitalise on the changes in governance, monitoring and data so that we have greater insights into the business as a whole. There are many opportunities to improve the insights that actuaries can gain into pricing, distribution strategy and product strategy.
Overall, this was a very thought-provoking session which I thoroughly enjoyed. I would like to thank Brendan, Bhrajna and Georgia for their efforts in researching these regulatory changes and sharing their observations and thoughts with us. From my perspective as a current student of the Actuaries Institute, it is particularly challenging to try to understand these changes against a backdrop of trying to learn about and understand the existing regulations. I found this session to be very helpful in breaking down our obligations and the ways that we can create positive outcomes for our customers and our clients, and I hope other viewers of the session did too.
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